Answer:
There is a well know Italian saying “take care of the pound, the penny will take care of itself”. Of course, it is grandly true either it may be with the national scene or a company situation or human life itself. We encounter a peculiar phenomenon, out of which the vital will be few and trivial will be many. Even it is a simple common sense that to solve any important problem, rigorous efforts are to be made and vice versa. In case of inventory management too, much of the effective time is spent on managing the important materials. And the motto behind any selective inventory control is that ‘equal analysis’ of all the items of materials will be very costly or expensive and the concentration will also be diffused. However, the importance of any material is going to be normally decided on the basis of its cost, its critically, its availability and its rate of consumption. The credit of coining this idea goes to a German Economist’ ‘Pareto’. He propounded this during 1896. Hence it is popularly known as ‘Pareto’s Law.’
There are a number of methods of Selective Inventory Control viz., ABC Analysis (Always Better Control Analysis), VED Analysis (Vital, Essential, Desirable items, Analysis), F.S.N. Analysis (Fast Moving, Slow Moving and Non-moving items Analysis), etc.
1. ABC Analysis
Always Better Control Analysis is based on the famous ‘Pareto’s law. Under this, the materials in the stock/store are classified by considering three important features:
- Vitality of the materials
- Consumption value of the materials
- Rate of movement.
The analysis reveals that:
i) A smaller % of items in the stores (say 10%) contribute to a larger % of value of consumption (say 70%);
ii) A large % of items in the stores (say 70%) contribute to a small % of value of consumption (say 10%); and
iii) Between these two extremes, the items which come, have the equal usage and consumption value.
Hence, the first category items are grouped under ‘A’ category, the third category items are grouped under ‘C’ category, and the second category items are grouped under ‘B’ category. The analysis can be fit into a rectangle to depict the significance of the analysis.
Let us consider a few examples of A B C Analysis and find out how the materials are classified.
2. VED Analysis (Vital. Essential and Desirable Items Analysis)
This analysis is basically used to control spare parts keeping in view criticality of the items needed in production, the spare parts are classified in to three categories as Vital Essential and Desirable. Such spare parts, if they are not available on time to carry on production activities and virtually the activities may come to a standstill. These items are categorized as ‘vital spares’. The spares, non-availability of which cannot be tolerated for more than a few hours or a day and the cost of lost production is high and at the same time ‘which’ are essential for the production to continue are known as ‘essential spares’. The spares which are needed but their absence for a week’s time or so will not stop the production activities are known as desirable spares. Even though some spares have negligible monetary value, they may be vital for the production activities. Hence, VED Analysis helps in effective and useful classification of materials/spares.
3. FSN Analysis (Fast-moving, Slow-moving and Non-moving Items Analysis)
Comparing the turnover of different kinds of materials becomes essential in order to find out which items are fast-moving, slow-moving and non-moving, in turn to enable to avoid blocking- up of capital in such stock. Generally, a low-turnover ratio is an indicator of slow-moving items leading to obsolete materials and unnecessary piling-up of stock. On the contrary, ‘a high turn over ration indicates the fast movement of stock and less investment on them. If the turnover is zero, it indicates that item has not been used during the period and there is a high chance of the material getting deteriorated. These items cause anxiety over exercising control over them because they increase the cost of material due to boosting up of carrying cost along with the material losses. The loss arising out of slow-moving stock can be reduced by reducing the quantum of material to be stored. While storing such material, the rate of consumption and the lead time should be considered.
In order to reduce the losses arising out of dormant items, only materials of absolute necessity are to be purchased. To avoid deteriorations, such materials are to be disposed off at the earliest. Thus, this classification and a periodical review of such items would help in exercising control over such materials.
